COLOMBO -- When a special five-member European Union delegation arrives in Colombo on Monday, its review of a vital trade concession could lead to substantial export losses for Sri Lanka, which has already suffered a steep drop in foreign reserves.
The European delegation will confer with stakeholders to learn more about something else many believe to again be in decline in the South Asian island nation: human rights.
"They will meet with all stakeholders to obtain information, and verify the commitment made by the government in relation to matters pertaining to human rights, international labor conventions and the environment," Denis Chaibi, the EU ambassador to Sri Lanka, told Nikkei Asia.
The visit will last until Friday, and meetings with government officials, opposition parties, industrial players and trade unions are scheduled. The delegation will scrutinize Sri Lanka's adherence to its commitments on human rights, labor laws and environmental protection, as well as enforcement of the Prevention of Terrorism Act.
The PTA legislation to counter terrorism and separatism was enacted in 1979, but remains in force and is regarded by many as a political weapon to stifle dissent and debate.
The investigation will determine whether the European trading bloc continues to provide a Generalized System of Preferences Plus (GSP+) concession on imports that has been highly favorable to Sri Lanka.
Times are already exceptionally hard in Sri Lanka. Apart from dwindling foreign exchange reserves, the vital tourism industry will not be bouncing back anytime soon.
"Obviously, the situation is delicate in the sense that Sri Lanka made a commitment in 2017 to review the Prevention of Terrorism Act when it got the GSP+ back, but this review has not taken place yet," said Chaibi. According to the ambassador, there has been no measurable progress on reviewing the act, and "this will be an important element" in the final report. The findings are to be submitted to the European Parliament in the first half of 2022 that will help determine whether or not to suspend Sri Lanka's trading privileges.
In 2010, the EU withdrew GSP+ privileges from Sri Lanka because of human rights violations under President Mahinda Rajapaksa, who is today prime minister. In 2017, when the previous government under President Maithripala Sirisena was in place, the EU reinstated GSP+ in return for a commitment to ratify and implement 27 international conventions on human and labor rights, environmental protection and good governance.
In 2019, Gotabaya Rajapaksa, Mahinda's younger brother, was elected president, and Sri Lanka was subsequently accused of a human rights U-turn. Rights groups accused the government of using the draconian terrorism law to stifle dissent and arrest activists.
A GSP+ concession slashes tariffs to zero on exports from vulnerable low and lower-middle income countries that implement the 27 international conventions. The EU bloc is Sri Lanka's largest export partner, and accounted for over 30% of export earnings in 2020. Textile and apparel exports to the EU stood at nearly $1.8 billion that year. In the first half of this year, total exports to the EU were worth over $1.2 billion.
Asanka Wijesinghe, a research economist at the Institute of Policy Studies of Sri Lanka, an economic policy research institute told Nikkei Asia that the value of the country's exports could fall by over $600 million if GSP+ is forfeited -- assuming that the UK would follow the EU's lead.
The EU closely monitors nine of its GSP+ beneficiaries -- including Armenia, Kyrgyzstan, Mongolia, Pakistan, the Philippines, Sri Lanka and Uzbekistan in Asia -- in regard to implementation of the 27 international conventions.
In August last year, the EU partially revoked free trading rights from Cambodia to protest human rights violations there. The EU then began levying taxes on Cambodian products, including garments and footwear.
Aroon Hirdaramani, the director of Hirdaramani Group, a leading Sri Lankan apparel manufacturer exporting to the EU, said clothing alone accounts for almost half of Sri Lanka's merchandise exports.
"Losing GSP+ would mean a loss of market share for the industry," Hirdaramani told Nikkei. "The economic consequences are serious as well: lower export earnings, job losses, many SMEs having to scale down, and the potential reduction of planned large investments."
According to Hirdaramani, the clothing sector has been "proactively engaging" with the government to try to encourage preferential trade agreements with key trading partners because GSP+ is such an important aspect of trade. "The continued growth of the apparel sector is strategically important to our economy."
Not everyone is pessimistic. Tuly Cooray, secretary general of the Joint Apparel Association Forum, said the EU visit is routine -- part of an "ordinary process." He was confident that GSP+ privileges will stand, and said human rights concerns were an "exaggeration."
Others are less sanguine. New York based Human Rights Watch (HRW) called on the EU on Wednesday to publicly set out a clear framework with short timelines for Sri Lanka to comply with its human rights commitments and retain tariff-free access to the EU market.
"Under President Gotabaya Rajapaksa, the Sri Lankan government has suppressed civil society, silenced protesters, targeted vulnerable minorities, further misused the abusive PTA, and reversed any progress on accountability for war crimes," said Lotte Leicht, EU director at HRW in a statement. "The EU should call out these blatant violations of Sri Lanka's obligations under the GSP+ rules and be clear about the consequences if human rights violations and impunity for war crimes persist."
Other developments have already shaken the industry. In June, the European Parliament passed a resolution strongly criticizing Sri Lanka's human rights record. The government was accused of using the anti-terrorism act to target members of minority communities and civil society. The resolution specifically mentioned the detentions of lawyer Hejaaz Hizbullah and poet Ahnaf Jazeem. The Europeans also denounced the appointments by President Rajapaksa of a number of current and former military commanders accused of being implicated in serious abuses.
The EU resolution noted the detention for ten months of Shani Abeysekara, former director of the Criminal Investigation Department, who had probed a number of high profile murder cases when President Gotabaya Rajapaksa was defense secretary. A week later, Abeysekara was released on bail.
If the EU were to withdraw GSP+, it would seriously affect Sri Lanka's foreign exchange position. According to the latest weekly bulletin from the Central Bank of Sri Lanka, official foreign reserve stood at $3.55 billion at the end of August, slightly up from $2.83 billion in July. Even with the mild rally, that is barely enough to cover imports for two months.